2019 Report on Kaiwen Education
This paper reports on important recent developments at Beijing Kaiwen Dexin Education Technology Co., Ltd. (Kaiwen Education), using information from a variety of resources including the company’s response to a second request for information from the China Securities Regulatory Commission (CSRC), a request prompted by Kaiwen’s desire to sell additional shares of company stock. https://www.rideraaup.net/kaiwen-announcement-11119.html
The paper begins with a summary that provides an overview of the company in 2019 and reports on significant new developments. A second section presents supplementary and important information on Kaiwen finances, industry position, and company operations.
In February 2019 Kaiwen Education remains a company in precarious financial condition. Applying the criteria developed by Rider University's President and Board of Trustees to guide the selection of a future owner of Westminster Choir College, Kaiwen remains a most unsuitable choice.
The company and financial analysts in China predict for-profit Kaiwen Education will end 2018 with another net loss. It has recorded a net loss in each of the first three quarters of 2018 and a cumulative net loss through September 30, 2018 of 71.4 million Yuan on revenues of 153.1 million Yuan, a remarkable loss of 47%. Since it acquired its first of two schools in 2016 the company has failed to generate a profit from its educational operations. Projections of student enrollment in both of Kaiwen's schools and profit have continually failed to materialize, and rightly reduce the credibility of current projections of future enrollments, revenue, and profits. Chinese government agencies continue to question the validity of Kaiwen's projections.
By all measures and by its own admission, Kaiwen education is a start-up organization in a crowded and competitive international education field in China whose future is uncertain.
Recently and significantly, Kaiwen changed its strategic focus, in an attempt to improve its revenue and achieve profitability. Kaiwen Education's web site and statements by its Chairman in 2018 indicated that the company eventually planned to open additional K-12 schools in what it called "first-tier cities" in China. Recent company documents submitted to government authorities announce a new strategic direction.
Now and instead, because of limited financial resources, Kaiwen Education seeks to open training centers in six China locations that offer extracurricular, non-compulsory, after-school, weekend, and summer-month classes for primarily 4-18 year olds. Kaiwen states: “The business of the company and its wholly-owned subsidiaries (that operate its schools) will not have significant reliance on the schools in the future” (CSRC Report, pg. 16) It believes that the market for such classes is large, though other organizations have already established themselves in this field and have considerably more expertise in many of the subjects Kaiwen plans to cover in its classes (CSRC Report, pgs. 42-44).
Consistent with its tendency in the past, with no centers open Kaiwen predicts robust enrollment, quick maturity, and high profit (30% annually) for this undertaking (CSRC Report, pg. 47).
To fund this endeavor, Kaiwen is seeking approval from the Chinese government for a non-public issuance of new shares of stock. Badachu Holdings, Kaiwen's largest shareholder, has committed to purchase at least 10% of this issue. Announced in Kaiwen's 2018 Semi-Annual Report, the goal is to raise 1 billion Yuan by issuing no more than 20% of the number of shares currently outstanding, or a maximum new issue of about 100,000 shares. Kaiwen's per share price has fallen precipitously (click on “1Y”) since the release of its 2018 Semi-annual Report last summer. In recent weeks Kaiwen’s stock has recorded a succession of new 52-week lows in trading, evidence of investor pessimism about this company. As non-public new issues are often offered at a per share price less than market, with the current per share price at about 7.0 Yuan (about US $1) the yield from this issue, assuming it is approved, will be more than 30% less than the 1 billion Yuan goal.
China's government, through the China Securities Regulatory Commission, continues to express concerns and raise significant questions about the new stock issue. On behalf of shareholders it has asked Kaiwen on two occasions to provide additional information and to justify its projections of success for this new strategic initiative.
By its own admission its cautiousness and even skepticism arises because of its earlier approval in 2016 of an identical request from Kaiwen to raise funds from the sale of new shares (CSRC Report, pg. 66). The proceeds from this sale - 1.725 billion Yuan, of which 1.2 billion Yuan was used to fund the construction of Kaiwen's Chaoyang K-12 school - failed, and continues to fail, to generate the financial outcomes promised by Kaiwen. Enrollment at the Chaoyang school today is at about 12% of capacity (CSRC Report, pg. 68 and http://www.chet51.com/rmxt/xiangqing5623729.html).
In Kaiwen’s response to the China Securities Regulatory Commission it is clear that Kaiwen has established a precedent of seeking reimbursement from each of its schools for the cost of land and building acquisition and school construction (CSRC Report, pg. 5, 6). This model applied to Westminster would burden the College and impose financial obligations likely impossible to satisfy without College liquidation. The survival of the College would be at risk.
It is important to note that despite Rider University's claim that Kaiwen Education is now entirely independent of its unsuccessful predecessor company, Jiangsu Zhongtai Bridge Steel Co., Ltd., Kaiwen through 2019 remains legally linked to this company, which was sold to others (Memorandum to the Rider University community from the Westminster Choir College Acquisition Corporation, August 8, 2018; and CSRC Report, pgs. 32-35).
Kaiwen is a guarantor of Jiangsu's performance on a series of outstanding Jiangsu contracts. Kaiwen's liability as a guarantor on June 30, 2018 totaled 915.2 million Yuan, then 43% of Kaiwen Education's net worth as a company, calculated by subtracting its total liabilities from its total assets. By the end of 2018 Jiangsu had completed projects and Kaiwen's liability as a guarantor had fallen to 303 million Yuan. Again, this liability will continue through 2019 (CSRC Report, pg. 35).
Kaiwen’s Projected Loss
Kaiwen projects a net loss for the 2018 fiscal year ending December 31 of from 85 to 98 million Yuan, a drop in income of 450-508% from 2017. The resulting net Earnings Per Share (EPS), a key metric for current and prospective shareholders, is from -.17 to -.19 Yuan. Earlier in 2018 Kaiwen had forecast a net profit of 30 million Yuan and an EPS of .06 Yuan. By the end of December 2018 a total of 8 institutions in China within 6 months predicted a Kaiwen net loss of 55 million Yuan, a net income drop of 335% from the year before.
Kaiwen claims that two factors are responsible for its projected net loss: high interest costs and an increase in the amount of depreciation and amortization required to be deducted from company revenue. An earlier report indicated that a high level of debt burdened the company with a sizable interest expense (“Kaiwen Education Technology Co., Ltd.: Performance Through the First Three Quarters of 2018”, November, 2018). Through the first three quarters of 2018 interest paid on debt consumed 14% of Kaiwen’s total revenues and was 28% of its operating expenses. Concerning depreciation and amortization expenses, they are necessary, sound, and typically predictable, and are regular costs of doing business.
Other factors significantly contributing to Kaiwen’s projected 2018 loss appear elsewhere in its current report to the China Securities Regulatory Commission. These include: slow growth in enrollment in Kaiwen’s two K-12 schools (CSRC Report, pg. 67); its school tuition, the highest among international K-12 schools in Beijing; and strong competition among the many K-12 international schools in Beijing (CSRC Report, pg. 12).
Financial Obligations of Kaiwen’s Schools
Kaiwen’s response to the China Securities Regulatory Commission provides insight on the relationship and arrangements it may establish with Westminster Choir College. Of great concern would be an attempt by the company to impose on the College the contractual and financial obligations it has placed on its schools in China, obligations that are not present in U. S. higher education.
These arrangements, as they attach College revenue, would put the continuation of Westminster at risk and thus discourage student enrollment, staff hiring and retention, and alumni support.
Kaiwen’s two Beijing schools are operated by two wholly-owned subsidiaries: Kaiwen Zhixin operates the Beijing Haidian school and Wen Kaixing (aka Wenkaixing) operates the Beijing Chaoyang school. The schools are the core source of income for the wholly-owned subsidiaries and are “the main service targets” of Kaiwen Education (CSRC Report, pgs. 1, 2).
The subsidiaries were responsible for school acquisition and physical improvement (Haidian school) or obtaining land use rights and new school construction, at a cost of 2.3 billion Yuan or US $341 million (Chaoyang school). The subsidiaries have “House Lease Contracts” with the schools and charge the schools rent on a sliding scale based on school enrollment. No rent is charged when enrollment is low – at the Chaoyang school, for example, when enrollment is less than 1000 students. When enrollment exceeds that figure the subsidiaries charge the schools 40,000 Yuan per student annually, which is 20% of a student’s annual tuition payment (CSRC Report, pgs. 5, 6).
At close to full enrollment the subsidiaries seek a per-square foot revenue and annual rate of return on its real estate investment that matches the returns of nearby commercial properties. For the Chaoyang school, for example, the rental charge at close to full enrollment is 160 million Yuan or US $23.7 million annually, providing a payback period and return on investment of 14 years and 6.85%, respectively (CSRC Report, pgs. 5, 6).
Both subsidiaries provide various consulting, staffing, daily management, and other services to the schools for which fees are charged, through contracts like the “Exclusive Management Consulting Agreement”, “Sports Training Agreement”, and the “Study Services Agreement”. These and other offered services, including extracurricular offerings such as art training, camps, and events are identified as “profit points” by Kaiwen (CSRC Report, pgs. 2, 3).
At least two other Kaiwen Education subsidiaries, Kevin Ruixin and Kai Literature, also separately charge schools and parents for services, including supplemental, sometimes personalized, extracurricular services. Kai literature provides sports training and Kevin Ruixin is mainly involved in study abroad counseling and related work (CSRC Report, pg. 6, and http://www.chet51.com/rmxt/xiangqing5623729.html).
Collectively and in addition to rent, Kaiwen subsidiaries charge the schools an additional 45,000 Yuan per student annually, or at least an additional 22.5% of a student’s school tuition. Thus, and in sum, at least 42.5% of student tuition is acquired by wholly-owned Kaiwen Education subsidiaries (CSRC Report, pgs. 6, 7).
From Kaiwen’s 2018 Semi-annual Report we also learned the following. In the first six months of 2018 Kaiwen Education purchased 12.3 million Yuan of goods and services for its schools from subsidiaries owned by its largest shareholder and controlling company, Badachu Holdings (4.2 million Yuan) or from organizations owned by one of the directors of Badachu (8.1 million Yuan - 65 % of the total) (pgs. 124, 125). In the United States, a board director profiting in some way from her/his position on a board, which exists at Badachu today, is widely prohibited on moral and legal grounds.
Kaiwen’s Competitive Standing
International schools in China consist of those that either work with children of foreigners who have work assignments in China or prepare Chinese youth to pursue college study abroad. In China in 2017 there were 126 children’s schools for foreigners, 367 private international schools, and 241 international public schools. In 2018, of the 85 international schools in Beijing, there are 21 international schools for foreigners, 42 private international schools, and 22 public international schools. Concerning the two Beijing districts where Kaiwen has a school, there are 20 international schools in the Haidian District and 30 in the Chaoyang District http://www.chet51.com/rmxt/xiangqing5623729.html.
Kaiwen characterizes the competition in this market as “increasingly fierce” (CSRC Report, pg. 12), and describes its education business as “still in the early stage of brand building and market development” (CSRC Report, pg. 13).
Kaiwen Education's Haidian K-12 school (“Kaiwen Academy”), the oldest of its two schools, now in its third year, ranked 25 out of 30 international K-12 international schools in Beijing in a recent in-depth study, a study focusing on schools placing a strong emphasis on AP, Advanced Level (England), and IB (International Baccalaureate) courses. Kaiwen's Haidian school's overall weighted score was 6.6 out of 10, using criteria that included school history and accomplishments, size and offerings, school climate, teacher-student ratio, and after-school activities. http://edu.sina.com.cn/ischool/2018-03-02/doc-ifyrzinh1448055.shtml
Kaiwen's two schools do not appear on two other lists - the best international K-12 schools in Beijing, and the best international schools in China. https://www.marketingtochina.com/top-international-schools-china-2017/ AND http://www.sohu.com/a/238860797_100093677
For more information on Westminster Choir College and Kaiwen, see www.rideraaup.net/saving-wcc.html